Share this story

Apple has more money than many nations, so it's only natural to expect the $137 billion cash and investment hoard to attract some controversy. Maybe even a few lawsuits.

That's exactly what happened earlier this month. Hedge fund manager and billionaire David Einhorn, who runs the market-beating Greenlight Capital fund, took direct aim at Apple's cash with a federal lawsuit.

What's going on?

The complaint, filed in the Southern District of New York, seeks to block one of Apple's proposals for shareholder approval at this month's annual shareholder meeting. The bit that Einhorn objects to is Apple wants to remove the ability to issue preferred stock without asking shareholders for permission first.

Einhorn would argue preferred stock could be used to return a ton of value to Apple's investors. He even held a press conference this week to explain the finer points of his "iPrefs" idea. Yes, the banker wants to coin a new term for a fairly standard financial instrument, if only to tie the campaign closer to the Apple brand in the court of public opinion.

Apple could return billions of dollars to shareholders in the standard ways: issue a large dividend or buy back a huge number of shares. IBM and Texas Instruments do both of these things to great effect, and the two have even taken on billions in debt to move their shareholder value boosts along. So there's some precedent in the tech sector, and Apple could simply follow their lead.

But Einhorn says neither option would do much for Apple owners. At best, a $90 billion investment in one-time dividends or special buybacks would increase market value by, well, $90 billion. It's like filling your bucket at one end of your waterlogged boat only to dump it on the other side. Hardly worth the effort, right?

Wait! I've got a better idea!

And that's where Einhorn rides in on a white unicorn, wielding a bold new weapon in his fight for shareholder value. What if Apple issued one preferred share for every regular share you own? These stubs would have a $50 face value and pay $2 in annual dividends for a meaty four-percent dividend yield. "What iPref holders should expect is to receive $0.50 a quarter in dividends, every quarter, forever," Einhorn said. The papers should trade for approximately face value on the stock market, assuming that the payout rate never changes. Ever.

This instrument would meet an unmet need for high-quality savings instruments, Einhorn argues. A four-percent yield on a simple, low-cost stock with Apple's financial muscle behind it, well that sounds like a great alternative to stuffing cash under your mattress. Individual investors with a need for high-interest savings would be a primary market for iPrefs, followed by retirement funds, insurance companies, and other vehicles with a focus on long-term stability.

This would supposedly unlock a ton of shareholder value, because Apple's stock would become attractive to entirely new kinds of investors. Income investors could buy the iPrefs while growth and value hounds gravitate toward regular shares. There is no compromise between business investments and dividend grants.

"The reality is that equity investors value companies using a number of metrics that have little to do with the common dividend yield," he said. So why not keep 'em separated? Everybody gets exactly what they're looking for—no more and no less. As such, he expects each iPref to take $20 off the value of regular Apple shares while they add $50 of face value themselves. So it's a net gain of $30 per iPref or an immediate 11 percent boost of total value.

Apple should start small so it doesn't confuse current investors, but could issue several rounds of these spiffy iPrefs over a couple of years. Five iPref distributions would effectively achieve the same thing as doubling the regular dividend to 4.6 percent. In the end, the company could spend less on iPrefs than it would invest in buybacks and dividend increases, but stock owners would see a dramatically greater difference in their portfolios. The preferred shares should raise Apple's total shareholder value by $150 per common share.

Is this for real?

If this sounds like magic and fairy dust to you, you're not alone. Einhorn presented his plan to a room full of seasoned financial professionals and he still had to explain many of the core concepts all over again in the Q&A session. The iPrefs plan may seem blatantly beneficial to Einhorn himself, but comes off as a Jedi mind trick to many observers.

The lawsuit isn't exactly meant to force Apple's hand in this direction. The proposal Einhorn objects to wouldn't make it impossible to issue preferred shares, just a little bit harder because Apple would need shareholder approval first. The current "blank check preferred stock" measure in Apple's bylaws is typically used as a defense against hostile takeovers, and it often goes by the more controversial "poison pill" moniker. For example, Netflix just added a preferred stock poison pill so it could stave off Carl Icahn's unwelcome advances. If Icahn builds a Netflix stake larger than ten percent of the company, a sudden flood of preferred shares would be issued to everyone but him, reducing his investment to a fraction of its former voting power.

Einhorn's proposal has nothing to do with takeover shields. It's kind of hard to find a buyer for something with a half-trillion-dollar price tag after all. Apple claims getting rid of the blank check provision would actually be good for shareholders, because management and directors would have less power to mess with your investments. Several large Apple shareholders would agree, and they plan to vote in favor of the proposal that Einhorn wants stricken down.

New York judge Richard J. Sullivan said it seemed improper to bundle that proposal with two other minor changes to the bylaws. Einhorn himself likes the other changes, which means he'd be voting against his own interests no matter what he does. That was enough to keep Apple's bundle off the table this year, as judge Sullivan ended up ruling in Einhorn's favor.

Einhorn's preferred stock idea may be good for investors, but his lofty value-unlocking targets seem a bit larger than life. The whole lawsuit drama shouldn't make much of an impact on Apple's capital plans one way or the other, but it does bring plenty of sweet spotlight to Einhorn's proposal. When you're doing battle with an Apple-sized behemoth, that's really all a regular old billionaire like Einhorn can ask for.

Pretty much this. Einhorn is looking for "easy street" with AAPL where his preferred stock would guarantee a certain level of performance and to hedge against the actual stock price. If AAPL had gone from $700 to $1000 as opposed to $450, you wouldn't have heard a peep from Einhorn yet. It truly is amazing, when GE's stock was hammered, they offered Buffett preferred stock and warrants because they "needed" the cash infusion. However, AAPL doesn't need anything from anyone, yet hedge fund managers want to get their greedy hands on the cash stockpile.

Instead, which this article didn't touch on, is that AAPL will most likely borrow the necessary money to pay a dividend like this because it's cheaper for them to do that then to rely on the cash stashed overseas and to still keep enough of a cash hoard here if needed for M&A. Only in 'Murrrrrrica would a company with $137 billion in cash reserves be forced to borrow money at 2-3% to pay off greedy hedge fund managers.

Who would have ever thought that having $137 billion in cash reserves ($45 billion stateside) and making a net of about $13 billion per quarter would ever be a bad thing. Only on Wall Street ...

This seems to be about keeping back door financial options open. A way to keep financial shenanigans still possible. I think they should still put it up for shareholder vote as a separate motion. Why wouldn't someone want better governance of their company?

Pretty much this. Einhorn is looking for "easy street" with AAPL where his preferred stock would guarantee a certain level of performance and to hedge against the actual stock price. If AAPL had gone from $700 to $1000 as opposed to $450, you wouldn't have heard a peep from Einhorn yet. It truly is amazing, when GE's stock was hammered, they offered Buffett preferred stock and warrants because they "needed" the cash infusion. However, AAPL doesn't need anything from anyone, yet hedge fund managers want to get their greedy hands on the cash stockpile.

Agreed. AAPL seems to be doomed to near-perpetual undervaluation and is only a smart buy over the long term. This is not necessarily a bad thing.

Quote:

Instead, which this article didn't touch on, is that AAPL will most likely borrow the necessary money to pay a dividend like this because it's cheaper for them to do that then to rely on the cash stashed overseas and to still keep enough of a cash hoard here if needed for M&A. Only in 'Murrrrrrica would a company with $137 billion in cash reserves be forced to borrow money at 2-3% to pay off greedy hedge fund managers.

What are the tax consequences involved with transferring some of this cash reserve value to stockholders? It's not so unbelievable that borrowing would be cheaper and easier than paying out "directly", not to mention there are many potential economic upsides to the introduction of a few billion dollars worth of debt owed by an entity as financially secure as Apple.

Quote:

Who would have ever thought that having $137 billion in cash reserves ($45 billion stateside) and making a net of about $13 billion per quarter would ever be a bad thing. Only on Wall Street ...

'Murrrrrica!

You seem to assume that having $137 billion in reserves is uniformly good and without practical difficulties. Mo' money, mo' problems...

I don't trust Einhorn to not bend this to his advantage. For example, perhaps the secret plan to be revealed later gives double "iPrefs" only to investors owning over a certain amount of shares. In his presentation he did say "one or more" iPrefs per share of common stock, but he didn't say every common stock share would get the same number of iPrefs.

This is unnecessarily confusing crap. Just double the current dividend and split the stock 10 to 1. Done. That alone will attract a lot more investors, both large and small.

OF COURSE he's using it to make money. He wants some of that $137B in cash horde that Apple has because he sees it as a golden goose. Buy Apple stock, get free money.

These kinds of companies are all about making money quick - if you think it's a get rich quick scheme, that's what it is. Who cares about fundamentals or other things in quality company - they see Apple has a lot of money, and they want to suck it dry.

I've read similar statements from other investment companies - and they's all equally laughable at how blatant they are. I've seen one that said "The stock has stagnated since 2008". Damn, you know, stagnated isn't exactly a BAD thing since plenty of others fell and never recovered. Or became worthless. Yes it didn't grow, too f'in bad, so sad, go trade it away because you obviously are not aware that since 2008, growth has been hard and most of us are lucky to have good paying jobs.

Where did the 4% come from?iHorn wants the shares issued at no cost to him. So he gets a free share with a supposed "face value" of $50iHorn gets $2 per year forever at no cost. That percentage requires a division by zero. If iHorn has a million shares he gets a free $50,000,000And $2,000,000 a year forever.

Agreed. AAPL seems to be doomed to near-perpetual undervaluation and is only a smart buy over the long term. This is not necessarily a bad thing.

No, it most certainly isn't. As a real investor, I'm not worried about whether the stock market likes Apple or not. What I care about is whether Apple is running a good business. If they are, then either the market will come around and recognize that driving up the share price, or the market will continue to undervalue Apple's shares, in which case Apple will be able to use the profit from their business to pay their investors a handsome dividend. Either way, I win. (Btw, anyone who has owned Apple more than 10 years at any point in its history has won big.)

This guy, however, is not an investor. He is a speculator who has owned the company for only a few years. And now he wants to make a quick buck with some smoke and mirrors. How irritating. I only hope he doesn't waste too much of Tim Cook's time. Cook has much bigger fish to fry than fighting off this malcontent.

This is hilarious. Apple executives put forward a measure to reduce their power, and increase shareholder power, and this shareholders sues them for it.

He does realize that if Apple execs don't want to issues preferred shares anyways then the shareholders inability to voting against it doesn't really matter, right?

Yeah, its absurd to oppose proposal 2. Since management won't willfully implement this scheme, the only way to implement it is via shareholder resolution with or without proposal 2. All this guy is telling me with this action is that he is a jerk who interferes with completely unrelated things just to get attention. That doesn't make me want me to support him one bit. I just voted my share for prop 2, even though it was invalidated- he should know he has zero support.

Frak this guy. I want Apple to stockpile as much cash as possible. This is smart, it gives them room to completely reinvent themselves if things go south. Now look at RIM, pretty much out of cash and if this first attempt at reinvention fails it is just game over.

Look at Apple back in the bleak days. No cash, they had to get by on loans from Microsoft to save them. Regardless of how cool Jobs was, they are only here because Bill Gates made it possible by giving them money and MS Office for Mac.

This douche wants them to get screwed again in the future. No thank you. Go start your own company and run it like an idiot with no cash cushion.

Think you are all missing the point. Apple has turned into a strange combination of rather poor money market fund (paying almost no interest) and consumer goods company.

From a shareholder point of view, there are far better places to put money on deposit - safer, more transparent, higher yields. A consumer goods company has no real need of it.

Its a very commonplace observation that the best returns from investors would be for them to invest the money themselves, and for the consumer goods company to get on with consumer goods, and not try to be a money market fund as well.

The likely consequence of the present direction is that Apple finds some way to either lose or fritter away its huge cash pile without actually improving performance of the consumer goods part of the business.

Apple has turned into a strange combination of rather poor money market fund (paying almost no interest) and consumer goods company.

Since when is Apple trying to be a 'money market fund'? This is a perception being forced upon them by random Wall Street types. This bunch doesn't like Apple's cash hoard because it makes all other companies look rather pale and pathetic by comparison, and they see it as something to be 'unlocked'.

If you don't like APPL's returns, then sell your shares and put the money elsewhere. If you can't or don't want to because you didn't buy at $13 back in the dark days, too bad, so sad.

At this point Apple doesn't need the Street nor its short-term "what's in it for me this very quarter?" focus. The right long-term solution would be for them to take themselves private. Unfortunately, their present market cap ($423 billion) precludes doing this all at once. But they should do so -- slowly, over the course of several years -- so that there's only a small rump of outstanding shares in the hands of investors, and the stock value is in Berkshire Hathaway territory.

Think you are all missing the point. Apple has turned into a strange combination of rather poor money market fund (paying almost no interest) and consumer goods company.

How long has it been this way, 2 years? How about letting history play out before jumping in and "fixing" things? See above re: greedy hands and huge stockpile. Apple earned their cash hoard via a combination of novel concepts they have coined as "sales" and "profit". This seems to be beyond the wherewithal of investors everywhere.

Quote:

From a shareholder point of view, there are far better places to put money on deposit - safer, more transparent, higher yields. A consumer goods company has no real need of it.

You forgot to add the word "short". Anyone holding AAPL for longer than 12mo is doing just fine. Why should the company care one bit about short-term "investors"?

Quote:

Its a very commonplace observation that the best returns from investors would be for them to invest the money themselves, and for the consumer goods company to get on with consumer goods, and not try to be a money market fund as well.

So go ahead and sell your AAPL, do just that, and compare results in 2018. Make sure to report back, we're interested in how it goes.

Quote:

The likely consequence of the present direction is that Apple finds some way to either lose or fritter away its huge cash pile without actually improving performance of the consumer goods part of the business.

Doesn't it seem a bit odd how Apple has all this money overseas and it is SO hard to get it into the US? It's like they are the first multinational company of something with this problem. Aren't they a bit to blame for poor money management?

Pretty much this. Einhorn is looking for "easy street" with AAPL where his preferred stock would guarantee a certain level of performance and to hedge against the actual stock price. If AAPL had gone from $700 to $1000 as opposed to $450, you wouldn't have heard a peep from Einhorn yet. It truly is amazing, when GE's stock was hammered, they offered Buffett preferred stock and warrants because they "needed" the cash infusion. However, AAPL doesn't need anything from anyone, yet hedge fund managers want to get their greedy hands on the cash stockpile.

Instead, which this article didn't touch on, is that AAPL will most likely borrow the necessary money to pay a dividend like this because it's cheaper for them to do that then to rely on the cash stashed overseas and to still keep enough of a cash hoard here if needed for M&A. Only in 'Murrrrrrica would a company with $137 billion in cash reserves be forced to borrow money at 2-3% to pay off greedy hedge fund managers.

Who would have ever thought that having $137 billion in cash reserves ($45 billion stateside) and making a net of about $13 billion per quarter would ever be a bad thing. Only on Wall Street ...

Doesn't it seem a bit odd how Apple has all this money overseas and it is SO hard to get it into the US? It's like they are the first multinational company of something with this problem. Aren't they a bit to blame for poor money management?

I think most people in the know of why Apple's money is over seas would say that it was smart money management to avoid taxes. It only becomes a problem when you can't spend that money elsewhere because there is too much of it to spend.

If they are paying taxes at say 15% (just a guess) on the money if they pay it out to shareholders they would rather pay 2-3% on a loan and use that for a payout. What needs to happen is the tax laws need to be changed to end loopholes for keeping money over seas.

I simply see it as a powerful investor buying into Apple and then trying to change how things are done at Apple, including getting some of that cash hoard. I don't know if Einhorn's proposal work work or not. Would the value of the preferred shares be greater than the loss in value of regular shares? The hardest thing to predict is the future. The thing is, Apple has been doing things their way for a long time. Apparently it works. If Einhorn fails at this, he'll probably just sell most of his Apple shares and move on to his next great idea.

Frak this guy. I want Apple to stockpile as much cash as possible. This is smart, it gives them room to completely reinvent themselves if things go south. Now look at RIM, pretty much out of cash and if this first attempt at reinvention fails it is just game over.

Look at Apple back in the bleak days. No cash, they had to get by on loans from Microsoft to save them. Regardless of how cool Jobs was, they are only here because Bill Gates made it possible by giving them money and MS Office for Mac.

This douche wants them to get screwed again in the future. No thank you. Go start your own company and run it like an idiot with no cash cushion.

There is an important point you're missing: at some point, due to current financial regulations, they're required to reduce their stockpile. They legally aren't allowed to keep stockpiling, which viewed from a broader economic perspective, is a law I agree with.

It behooves them to take care of it sooner rather than later, as well, if links posted in previous articles (i.e. microsoft having the same problem) are any indication.

Think you are all missing the point. Apple has turned into a strange combination of rather poor money market fund (paying almost no interest) and consumer goods company.

How long has it been this way, 2 years? How about letting history play out before jumping in and "fixing" things? See above re: greedy hands and huge stockpile. Apple earned their cash hoard via a combination of novel concepts they have coined as "sales" and "profit". This seems to be beyond the wherewithal of investors everywhere.

Quote:

From a shareholder point of view, there are far better places to put money on deposit - safer, more transparent, higher yields. A consumer goods company has no real need of it.

You forgot to add the word "short". Anyone holding AAPL for longer than 12mo is doing just fine. Why should the company care one bit about short-term "investors"?

Quote:

Its a very commonplace observation that the best returns from investors would be for them to invest the money themselves, and for the consumer goods company to get on with consumer goods, and not try to be a money market fund as well.

So go ahead and sell your AAPL, do just that, and compare results in 2018. Make sure to report back, we're interested in how it goes.

Quote:

The likely consequence of the present direction is that Apple finds some way to either lose or fritter away its huge cash pile without actually improving performance of the consumer goods part of the business.

1) Apple has done very well over the past ten years. Even if they were to have no significant new innovations come to market over the next few years (unlikely) they would still make money hand over fist due to inertia and due to their very good supply chain management.

2) Apple's cash stockpile allows them to not worry about financing, and allows them to make moves they otherwise couldn't. Its presence is part of the reason for their success (investing into upstream partners, funding R&D)

3) a) M&A activity as a way to generate returns tends to be negative for long term shareholders. Positive ROI M&A tends to be operationally justified first and foremost. A large cash pile would ordinarily tempt management to engage in the former, but Apple seems to have avoided that.

b) There is no reasonable way for Apple to deploy all the cash it does have on hand effectively over the medium term, and it is a cash generating business.

Given those three predicates, the "consumer goods business with a MMF bolted on" characterisation is actually quite accurate. If optimal returns are sought (and a good investor seeks this) then the best course of action is for Apple to return cash to shareholders at a predictable, preannounced rate until it has a level enough for it to engage in the daring moves that has made it do well, and then investors can put the money they receive back to work, rather than having it decay (which it is, make no mistake).

Turning this into a falsely dualistic situation is stupid (makes your argument look stupid, and yields no useful discourse). One can easily buy into or hold the stock (because one believes that Apple's management will run the company well) while thinking there is room for optimisation. And make no mistake, this is a question of optimisation. Anyone making an investment decision based on this drama is at best...short sighted.

Frak this guy. I want Apple to stockpile as much cash as possible. This is smart, it gives them room to completely reinvent themselves if things go south. Now look at RIM, pretty much out of cash and if this first attempt at reinvention fails it is just game over.

Look at Apple back in the bleak days. No cash, they had to get by on loans from Microsoft to save them. Regardless of how cool Jobs was, they are only here because Bill Gates made it possible by giving them money and MS Office for Mac.

This douche wants them to get screwed again in the future. No thank you. Go start your own company and run it like an idiot with no cash cushion.

There is an important point you're missing: at some point, due to current financial regulations, they're required to reduce their stockpile. They legally aren't allowed to keep stockpiling, which viewed from a broader economic perspective, is a law I agree with.

It behooves them to take care of it sooner rather than later, as well, if links posted in previous articles (i.e. microsoft having the same problem) are any indication.

Not intimately familiar with US corporate law, so I was not aware of this. I'm not able to find anything that compels them to disburse cash - any chance you could provide a link?

. What needs to happen is the tax laws need to be changed to end loopholes for keeping money over seas.

If you figure out a way to do that without disincentivising overseas investment, do not pass go, do not collect £200, go you your tax authorities, propose it to them, collect £200*10^n, where n is some integer you get to decide within reason.

There are good reasons the tax system is complex (though it could be improved significantly).

. What needs to happen is the tax laws need to be changed to end loopholes for keeping money over seas.

If you figure out a way to do that without disincentivising overseas investment, do not pass go, do not collect £200, go you your tax authorities, propose it to them, collect £200*10^n, where n is some integer you get to decide within reason.

There are good reasons the tax system is complex (though it could be improved significantly).

b) There is no reasonable way for Apple to deploy all the cash it does have on hand effectively over the medium term

And that's where you're wrong. If Apple management thought that, they would have given the money back to shareholders long ago. They don't think that because-A) they might need to buy out a large company like Sharp or Intel, both of which would carry much strategic value in the battle with Android.B) they might have to buy out a bunch of smaller companies, such as cable companies or content producers, in order to get Apple TV off the ground. C) they might have to weather a serious downturn as they did in the 90s or BB is doing today.

Obviously A, B, and C are not ideal scenarios for Apple, but they need the money in the bank as insurance. I hope Apple doesn't fall victim to the short sighted machinations of a few Wall Street speculators. That would be a sad day for shareholders.

Well yeah... I'd have to agree this is just a money grab ploy by Einhorn. However, as a company is owned by the shareholders I kinda agree that certain company actions should be subject to a shareholder vote. Whether a shareholder is new, a veteran, in it for the long haul, or just out to make a quick buck - shareholders are owners. If a shareholder wants to vote on something, they should at least take that into consideration. Then, well, you just have to hope that enough of the shareholders have the wherewithal to make the best decision.